Vertical Integration in Starbucks Essay

1007 Words Dec 5th, 2011 5 Pages
Starbucks & Vertical Integration
Ques 1. Starbuck’s value chain is farmers, roasting, distribution, and retail.
Raw Materials (Coffee Beans): Coffee bean farming is not vertically integrated into Starbucks; the company purchases coffee beans from farmers. Starbucks choose to outsource farming due to the low potential hold-up problem. For its coffee, Starbucks uses only high-quality Arabica beans, instead of regular commodity and lower quality robusta beans. Since there are a lot of market participants trading Arabica beans (i.e. farmers & Arabica beans buyers), there is an established market price. Moreover, farm land has a low degree of asset specificity, and therefore farmers’ investments do not depend only on Starbucks as
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Since company’s quality standard is so controlled and strict, it would be very costly to negotiate a contract that would be enough to provide type of maintenance Starbucks requires and prevent a moral hazard problem.
Distribution & Warehouses: Starbucks is not vertically integrated in distribution and warehouses. It outsources to distribution and warehouses specialists , because there is low risk of a hold problem and low transaction cost for contracting. Market price for distribution and warehousing is established because there are many distributers and many buyers who need their service. Additionally, warehouses and transportation used for distribution (i.e. trucks) are not specifically tied to coffee beans and have really low degree of asset specificity.

Retail: Retail is vertically integrated into Starbucks. Instead of franchising, it has company-owned stores. Starbuck choose to vertically integrate due to its main strategy of selling a unique “Starbucks experience.” More specifically, Starbucks stores aim to create a “consistent, inviting, stimulating environment that evoked the romance of coffee, that signaled the company’s passion for coffee, and that rewarded customers with ceremony, stories, and surprise.” For this strategy to be successful, the company needs to “replicate precisely” this experience in all of its stores. But the amount of control required to maintain this much consistency is too costly to negotiate in

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